Three Basic Estate Planning Techniques – Is One Better Than the Others?

Basic Estate Planning

One common question we are often asked by clients is: Do I need a living trust? For many clients, a living trust is a valuable device that can serve a number of purposes. But it is important to understand testamentary trusts and how they sometimes serve as valuable alternatives to living trusts. Furthermore, trust planning can sometimes be avoided altogether where simple asset-titling strategies are utilized effectively.

Most people eventually put a living trust in place to hold some, or often the majority, of their property. The living trust is probably the best vehicle for probate avoidance. The living trust serves as a receptacle to hold property owned by the creator(s) of the trust, called the grantor(s), during life, and names beneficiaries of the trust property upon the surviving grantor’s death. Probate is completely avoided for all property held by the trust, and may pass to the beneficiaries named in the trust document without delay and with minimal work involved.

However, not everyone needs a living trust. For younger couples in their thirties and forties who are unlikely to have any major health crises in the near future, sometimes a simple will suffices. The will determines who shall receive the couple’s property upon death, and the property must be probated. That is, the will must be submitted to probate court for a more formal and time-consuming administrative process. The will is less expensive to set up, though, and is easier to change than a living trust. Later on in life, as illness and death become more imminent (and more property has been accumulated), a living trust becomes appropriate.

Sometimes though, trusts are sought less for probate avoidance purposes and more for control issues. Some couples have children or relatives whom they would like to receive their property, but with certain restrictions in place. For instance, some children may have spendthrift issues, or may have special needs that leave them incapable of managing their own money. While living trusts can put certain restrictions in place for beneficiaries, testamentary trusts can serve as suitable, less expensive alternatives.

Testamentary trusts are created through an individual’s will and do not take effect until the death of the person creating the will. For example, a father might draw up his own will requiring that all funds passing to his adult-disabled son shall be placed into a testamentary “special needs” trust. Thus, the special needs trust will only come into play on father’s death and its terms will be specified in father’s will itself. In practice, this means that father need not transfer any assets into trust during his lifetime, which saves him time and expense. The downside is that probate is not avoided and is instead required to transfer father’s assets into the testamentary trust.

Where probate avoidance is the goal, and one’s assets are not many or complex, asset-titling can sometimes work just fine. All property or accounts which have either a joint-holder named or a death beneficiary listed, avoid probate and pass automatically on death. Thus, for a widowed father with only one son, and whose assets consist of only a few bank accounts and a house, it is possible that simply naming son as a transfer-on-death (TOD) beneficiary on the accounts, and as a “remainderman” on the house, will do everything he needs. There are a number of other factors which might weigh against this simpler approach, but those are part of a more detailed conversation which should be had at the outset of any planning.